Commissioner of Income Tax vs Gaja Advisors (P.) Ltd.

This appeal by the Revenue in the case of Gaja Advisors (P) Ltd. relates to the assessment year 2006-07. The respondent-assessee had filed the return declaring an income of Rs. 3,06,525 on November 22, 2006, which was revised to income of Rs. 1,45,756 on November 30, 2006. This return was again revised on March 29, 2008, declaring a loss of Rs. 41,14,537. The last revised return was taken up for scrutiny assessment and assessment order dated December 18, 2008, was passed by the Assessing Officer, disallowing the expenditure of Rs. 42,60,293 on the ground that it should be capitalised as it was "project work-in-progress".

The aforesaid finding was reversed by the Commissioner of Income-tax (Appeals) and the said order has been affirmed in favour of the respondent-assessee by the impugned order dated December 6, 2013, of the Income-tax Appellate Tribunal (ITAT).

Basic facts may be noticed. The respondent-assessee was engaged in activity of providing consultancy services to Indian and foreign companies and with effect from June 1, 2004, they expanded into rendering venture capital advisory services to global funds in relation to India focused investments. Initially, the assessee had treated the expenditure incurred of Rs. 42,60,293 as "project work-in-progress" and had not claimed the said expenditure in the profit and loss account. Before the Assessing Officer, the assessee had submitted that they had increased the scope and ambit of their business to provide venture capital advisory services to Gaja Capital India Fund and to act as a sub-advisory of Gaja Advisors Ltd., Mauritius. Copy of the invoices raised by the assessee were enclosed. It was stated that the income from the agreement was continuous in nature and expenses were written off by the assessee in the next year, i.e., the assessment year 2007-08. The aforesaid expenses were accordingly added back in the income on account of the prior period expenses in the assessment year 2007-08. Copy of the financial statement of the assessee and the income-tax return of the year 2007-08 were enclosed. The Assessing Officer held that the assessee had changed the method of accounting as earlier, the expenses incurred were treated as "project work-in-progress" to be written off against income earned by applying the "principle of matching". The Assessing Officer observed that the net result of operations in the assessment year 2007-08 would be a loss even after writing back the "project expenses" and, thereafter, the revised return claiming expenses of Rs. 42,60,293 was filed. The stand and stance of the respondent assessee was rejected.

The Commissioner of Income-tax (Appeals) accepted the plea and the contention of the respondent-assessee, inter alia, recording that at the time of finalisation of accounts for the assessment year 2007-08, the assessee was advised to claim deduction of the expenditure in the respective assessment years to which it pertained since the same was in the nature of revenue expenditure incurred in the course of business and was allowable under section 37 of the Act in accordance with the accepted principles of taxation. The revised return was filed in this year and similar expenditure was claimed in the income-tax return filed for the assessment year 2007-08. The Commissioner of Income-tax (Appeals) noticed that for the assessment year 2008-09 again the assessee had followed the same method and had claimed the expenditure incurred as revenue expense. Copy of the invoices were placed on record before the Commissioner of Income-tax (Appeals). He observed that the Assessing Officer had only commented upon the change in the method of accounting and held that when the respondent-assessee had followed the same method in future, there was no question of disallowance.

The Tribunal, in the impugned order has referred to the factual matrix and agreed with the findings and the ratio of the Commissioner of Income-tax (Appeals).

Method of accounting is one aspect and regardless of the treatment given in the books of account, the expenditure, if it is revenue in nature, can be claimed under section 37 of the Act (see The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, . The core and important aspect which should have been determined by the Assessing Officer was whether or not the expenditure was revenue or capital in nature. This aspect was missed and not adverted to by the Assessing Officer but he relied upon the entries in the books of account or the treatment given in the last year. This was not the appropriate manner to deal with the contention and issue whether or not the expenditure was wholly or exclusively for the purpose of earning of income. There is no discussion in the assessment order on the said aspect. The issue in question could be answered by examining and elucidating whether the new activity was an extension of the existing business and also by examination of the nature and character of the expenses. The Assessing Officer, unfortunately, has not dealt with and examined the said aspect but made the addition. We do frequently come across the cases where prior period expenses stand disallowed by the Assessing Officer on the ground that the expenditure should have been claimed in the earlier years. We are not inclined to remand the matter as in the subsequent years, the assessee has followed the same method of computing income without any addition on the said account. Moreover, even if addition of Rs. 42,60,293 is made in this year, the said expenditure will have to be allowed as a deduction in the subsequent years. The income declared in the revised return filed on November 30, 2006, was income of Rs. 1,45,756 and in the revised return loss of Rs. 41,14,537 was declared. The tax effect and the tax involvement would be minimum and in case we take a holistic view by taking future years in question, there possibly would not be any tax collection shortfall. With the aforesaid observations, the appeal is dismissed.